Chapter 8 - Consideration and Privity

In chapter 7 we discussed 3 ingredients required to preform a contract: intention to

create legal relation, offer and acceptance now we look at 2 more
We will examine consideration and privity of contract
unless consideration on both sides of deal courts will not enforce a parties agreement
Privity of contract identifies the parties to a contract (determines who can be sued)

Consideration (PG184)
Goal on contract law is to enforce bargains bargain is more than offer and
acceptance, there must be a mutual exchange in value, without no legal value
EX you offer computer and i accept it is a gratuitous promise as nothing of legal
value was given for the computer
Gratuitous Promise- promise for which nothing of legal value is given in exchange
You are entitiled to keep the computer if its given but no contract to enforce
arrangement, b/c there was no bargain i can change my mind to give computer
Must be an exchange of value for contract, consideration needed by both parties
Consideration- exists when a party either gives or promises to give a benefit to
someone else or suffers (or promises to suffer) a detriment to them-self
So both parties, on each side must promise to do something, for either of the
promises to be valid
EX i give $5000 to your brother and you promise to give my sister a car
Concept is vary broad we exam details to aviod problems

Sufficient and Adequate Consideration

Contract must be support by Sufficient Consideration - almost anything of value
EX sufficient for someone to give up smoking and drinking in exchange for 10k
Expectations are not enough too support an enforceable agreement
EX father give 10k for daughter to act kind and caring = no contract
Not clear why but rule created to avoid being involved in intimate matters
Consideration must be sufficient but not adequate
Adequate Consideration- has essentially the same value of consideration for which
it is exchanged
If i give you a computer worht 5k for the promise you stop smoking and drinking ot
even $1 then it is enough looks like a bad bargain contract is likely formed but law
assumes you can look out for your own best interest so you can decide the price
Referred to as peppercorn throey pepper corn for a horse obviously has has more
value but adequate consideration isnt necessary so contract and enforceable

Forbearance to Sue - PG 186 read case 8.1

Involves an understanding of the above
Def: a promise to not presue a lawsuit
B/c expensive many try to avoid for this reason they often enter a contract to avoid
Ex the potential plaintiff give up the right to sue if the defendant agrees to less
money then orginally owed
Obviously consideration if plaintiff would have won but if agreed to not presue a
lawsuit and they later found out they would have lost but the judge would still likely
 enforce the agreement b/c consideration just not adequate still gave up right
In some situations the courts will not enforce forbearance agreement especially if the
party that threatened to sue did not honestly believe that they had a calid claim in the
first place

Past consideration (PG 186

There must also be mutuality of consideration - requires that each party provide
consideration in return for the other partys consideration
Mutality makes the idea of past consideration as invalid (cant support a contract)
Past Consideration- Something that a party did prior to the contemplation of a
contract
Invalid b/c not given in consideration for other parties consideration
Difficult to determine so use 2 things
EX a lawn service company cuts your grass without being asked, you come home
and your thrilled with the job and agree to pay 100 $
You are not obligated to keep the promise b/c no contract b/c service was provided
before promise to pay so work was not exchanged for promise
EX but lets say you saw they did a good job on your neighbours lawn and ask them
to do your lawn then after agree to pay for service there is still a contract
In this case service is not a past consideration b/c a reasonable person would have
interpreted your request to include a promise to pay a reasonable price for the
company before service, if cant agree on price before must pay a reasonable price
determined by judge
In other worlds lthough terms not stettled in the the outset there was a sufficient
meeting of minds, so companies considerations were valid as a return from your
implicit promise to pay
Rule on past consideration may not always be fit with fair and morality
EX you see someone laying dace down in the water and preform CPR and bring
them back to life and they agree to pay 500 a year for the rest of their life there is no
contract because saved life before agreement

Pre-existing Obligation
Act preformed before an agreement = past consideration, no contract
Can a contract be supported by a promise to fulfill per existing obligation?
DEF: an obligation that existed but was not actually preformed, before contract was
contemplated
3 types of pre-existing obligations we must distinguish:

1. Pre existing Public Duty

A person who who owes a pre-existing public duty cannot rely up that obligaton as
consideration for a new contract (not a good consideration for new contract)
EX Police/firefigthers called cant sell you there service under contract b/c as public
servants the promised to help people in emergencies (past consideration), therefore
they have nothing more they can offer for new agreement
Also against public policy to allow public servants to take advantage of a persons
misfourtune by charging for a service fee
 But good to note once they finish there shift (off duty) they can do as they please and
have no obligation to stop thieve in sight or fight a fire

2. Pre-Existing Contractual Obligation Owed to a 3rd party

A pomise to preform a pre-existing obligation that previously arose under a contract
with a 3rd party can be a good consideration for a contract (valid)
Despite promising one thing can use same consideration to extra valuable promises
from two different parties
These does also create some danger/risk
EX a quartet is hired by a promoter to do a show for 15k (contract 1) and after
obligation to preform persuades the publisher of show for 20k (contract 2), if all goes
well get money for both for preforming one thing but it fail to preform are liable for
both, (EX fu chip shares contract with company and large shareholders)

3. Pre-Existing Contractual Obligation Owed to the Same Party - PG189

Can use a pre existing obligation as a good consideration for a contract with a 3rd
party but if a pre existing obligation from one contract i used for the same party then
is not a good consideration b/c is just a repeat
Courts hold the same person cant be required to pay for the same benefit twice
This prevents a person from threatening to breach one contract to get the other party
to enter into a second contract with a higher price
EX PG189 Steel guy sells on contract to company, steel guys supplier raises price
and company agrees to pay more to steel guy but end up refusing b/c they can
OFten like the situations above companies are allowed and tend to re negioate the
contract to ensure deal benefits both to develop and maintain a long term relationship
For this reason if a party promises to revise the terms of a contract it should
sometime be enforceable if the revisions accurately reflects an unexpected change in
circumstances recently adopted in Canada
In addition to avoid risk can use novation process to discharge the intial contract and
enter a new contract with a higher price
Also could agree to do something slightly new for price change ex delievery date
amount of steel to make new contract valid add consideration both sides (fresh
consideration)
Or despite like of consideration new agreement binding if made under a seal
It is often ignored anyway as stated before for good business
Promise to forgive an existing Debt
Similar to steel case, when a creditor promises to forgive a debt for a lesser price
EX I lend you 100 for one year no interest, in 1 year you only have 70, in exhchange
for the 70 I promise to discharge the full debt, but after i insist you still owe me the
30 am i Entitled? Could make cause no b/c new consideration accepted the 70 and it
provided a benefit and saving the expense of sueing me if i gave nothing, and if i go
bankrupt you could possibly get nothing. Practically yes new consideration, in law no
a court will rule a payment of 70 is just a part performance of early promise and is
not a fresh consideration and I am entitled to demand the 30
Seen as unfair so court have several expectations:
1st a promise to accept a smaller sum is enforceable if placed under a seal
 2nd a promise to accept less money is enforceable if a debtor give something new in
exchange for it EX 70 plus a toaster id enforceable or even changing the form of
payment may be enforceable
In Canada a statutory exception exists that allows debt to be extinguished upon a
payment of a lesser amount
Section 16 of the Mercantile Law Amendment Act in Ontario is Typical: part
performance of an obligation expressively accepted by creditor before or after
breach for that purpose without any consideration debt is extinguished
Part performance = some amount paid, so if agree to accept 70 for all can change
your mind and insist full payment until part payment is received
Doesn't apply for an unconscionable manner- offer only 70 b/c you know they
desperately need money so you know they will accept even tho have the 100 this is
seen as wrong and even accepted you can still sue for the full amount of can prove

Promises Enforceable Without Consideration (192)

General rule = promise only enforceable only if it is contained in a contract that is
supported by consideration
Two Exceptions : Seals and Promissory Estoppel

Seals
DEF: A mark that is put on a written contract to indicate a partys intention to be
bound by the terms of that document, even though the other party may not have
given consideration
Done to ensure they are aware of the seriousness of making an enforceable decision
outside the usual bargaining process, make the person realize will be enforced
EX I need loan and my parents co-sign to take on debt if i cant repay even though
there is no consideration signed document will seal will create an enforceable
guarantee
Done by red adhesive waiver or simply writing seal on the paper court insist seal is
applied at the time that a party signs a document not after

Promissory Estoppel
Estoppel- A rule that precludes a person from disputing or retracting a statement that
they made earlier
This always people to be estopped in court for unfairly denying the truth of a prior
statement if the person the statement was made to relied on it
EX person tricked into believing that is your land when its mine you build a house
there i claim its mine, if you take me to court i can be estopped from denying the
truth of your earlier statement that i owned the land as a result i may be rewarded
land and house
Traditionally only applied to past present, more recently future facts
Promissory Estoppel is a doctorine that prevents a party from retracting a promise
that the other party has relied upon
Creates an exception to the general rule that enforces only promises that were
acquired in exchange for consideration
EX rents apartment for set amount during war no income so reduces payment to half
 after war can afford, court ruled price could be brought back to orginal but could not
recover any of the discounted rent even though it was supported by consideration b/c
statement was relied on by renter to not pay that amount
Only Apply if 4 requirements met
1. The representor (party making promise) must clearly indicate that they will not
enforce their legal rights against the representee, ex accepting late payment isnt
saying future payments don't need to be made on time b/c was never clearly indicated
2. Representee must rely on the statement in a way that would make it unfair for the
representor to retract their promise EX apartment budgeted money accordingly and
set aside promised amount
3. The representee must not be guilty of inequitable behavior (unfairly pressure
representor to make the statement
4. The representors statement must be made in the context of an existing legal
relationship (legal relationship between 2 parties exist even if relied upon
If these 4 met representor cannot assert there original rights with respect to the past
Party may be allowed to enforce original rights in the future if they give original
notice

Privity of Contract
Privity of contract identifies people who can be involved in the enforcement of
contract and is closely tied to idea of consideration
Determines who can sue who typically either party can sue if fail to complete there
obligation promised
Gets complicated if facts involve strangers- someone who did not participate in the
creation of the contract
Ex if you pay me 5k to give a car to your sister and i refuse once money recieved she
likely cant compel a me to fulfill the contract as a court would say no
This is b/c Contracts are used to distribute benefits amongest the parties You and I
cant impose and obligation on someone not part of the agreement same for the sister
a person who isnt part of the agreement cannot take advantage of it
Privity of Contract- the relationship that exists between the individuals who create a
contract
Only those people who can are parties to the agreement
Only parties can sue or be sued on contract
Privity of contract often expressed as consideration doctrine b/c generally speaking
only people providing value in a contract can sue/be sued
EX sister expected to get car but didnt bargain for it, so she cant sue and brother can
demand money for the car and can sue but the obligation to pay 500 was to the sister
who has no bargaining power so would likely lose in court
In recent years it was altered in Canada due to what many thought as unfair decisions
Where not abolished can be avioded in several ways:

Assignment PG 195
Def: process in which a contractual party transfers their rights to a third party
Assignor- the contractual party who assigns their contractual rights
Assignee- the stranger to whom the contractual rights are assigned
 Debtor- the original contracting party whom is assigned right can be enforced
Can be complicated best way to avoid should get lawyer to do

1. Equitable Assignments
DEF: An assignment that was traditionally enforced by the courts of equity (CH1)
possible to make an equitable assignment of a contractual right
Exception = parties agree their rights are non assignable, our court can revoke on
policy grounds EX marriage support
Simple, can be done orally but to aviod risk best to use written when possible
Does not need a debtors consent but several reason to notify debtor as soon as
possible
EX debtor only has to pay back once so if the pay the assignor before a receiving a
notice then you cannot demand a second payment yourself
Same if assignor wrongly assigns two ppl debt first one to notice gets
Taking an assignment Subject to the Equities (another reason to give notice)
Def: means that the debtor can generally use the same defense and counterclaims
against the assignee that they could have used against the assignor
Is fair as debtor should not be in a worse position due to a change in ownership
But also fair to asignee as they can sue assignor for any amount of money that was
not recoverable due to their actions
Important to draw distinction between that defense/ counterclaims that is the subject
of assignment also Defenses and counterclaims arose out of other transactions
between debtor and creditor
Debtor can always rely on first category of defense and second only if there
transactions with assignor occured before they recieved notice from assignee
Contractual rights flexible but can create many problems
Ex assignee wants to sue debtor then may have to include assignor a a party to that
action and if unavailable then hard

2. Statutory Assignment
To avoid problems associated with equitable assignments Canada created
Statutory Assignment an assignment that conform to the requirement of a statute
Same principles equitable assignment but have 3 special requirements :
A. Must be written
B. Written notice required for valid statutory assignment
C. Must be absolute at the time created, cant be conditional (depends on some
uncertain event in the future) or incomplete (cant cover part of debt must be all)
If these arent met then is an equitable assignment and maybe preferred in some
business scenarios as amount needed from supplier may vary and price may vary too

3. Assignments by Operation of Law

Unlike previous doesnt arise from intention, arises by operation of law
EX when contractual party goes bankrupt all of its rights and liabilities are placed
under administration of a trustee or if someone dies liabilities are placed under the
administration of a personal representative
Either event assignee has the respsonsibility to pay a persons debts but not
 obligations in a personal

Vicarious Performance
Unlike contractual rights, contractual obligations cabt be assigned
General rule is a party must personally preform, clearly true if parties skills are
needed for fulfillment of contract EX hire actress cant send over asignee to play role
as contract is for her services
However vicarious performance is allowed - When a contractual party arranges to
have a stranger preform their obligation (not a form of assignment)
Only an option when parties personal skills aren't needed
EX hire a contractor to build house cant reasonable expect to build alone is entitled
and is clear they will use employees and sub contractors
But obligation to build house is still on builder and if house is defective due to others
work they sue the builder

Trusts
An exception to the privity of doctrine involes the equitable concept of the trust
Trust- occurs when one person holds property of behalf of another
Trustee= person whold hold property on behalf
Beneficiary= person on who behalf of property is held
Want to leave money for grandchildren education but fear they will spend
irresponsible so give to trustee to who will sensibly spend it on their behalf
Can be used to avoid consequence of a privity doctrine
EX car example instead of saying give car to my sister since you are paying you
receive the car on a trust for your sister Beneficiary
A contractual promise is a type of property
Cant be seen but courts treat it as something that exists and that can be transferred to
another person
For car ex you have legal ownership of my promise and my sister will have equitable
of beneficial ownership of promise so she has the right to sue you if you refuse
Once upon a time was used often but now severely restricted unless clear proof trust
was actually intended and is now used much less

Statue
Canadian law has realized that privity doctrine often creates injustice and supreme
court has questioned the atittude of the Privity council resulting in a number of
exceptions thay allow strangers to enforce promises
Clearest illustration = car issurance EX purchased for self and daughter, daughter is
beneficiary of contract under common law daughter has no right to enforce but does
with this legislation
Same eith life insurance b/c must be taken out on other people it would be unfair in
either situation to deny payment

Employment
When customer agrees to do work for a customer, it is usually obvious that the actual
task will be preformed by its employees
 Furthermore they sign an exclusion cause expressing customer can not sue company
or employees, however if careless act is preformed customer may sue them in tort
and argue they cant rely upon the contractual exclusion b/c not parties to contract
Supreme court held employees may be entitled to rely upon exclusion cause as it was
created for their benefit even tho lack of privity in contract
Rule: employee is cover by limitation clause contained in a contract with a 3rd party
if employee is expressively or implicitly contained in clause and the employee
preforms work that is required by the contract

Himalaya Clause (PG201)

Def: A special term of contract that protects a 3rd party beneficiary from liability
Form name of case where result was fair to employees and not unfair to plaintiff to
extend the exemption clause beyond immediate parties to contract
Arose from maritime shipping rule hague rules which strictly limits liability for any
losses that a carrier may cause to property owner to 500 per package
Makes sense in business as accidents bound to happen
Allows some liability for carrier who knows nothing of product and purchaser of
product knows all about the product and is encouraged to purchased the appropriate
insurance
Benefit lost as owner would sue individual people who handled the goods
Carries therefore started to enter special term or clause with two features; extended
limitation on liability to all people handling goods and said carrier acted not only for
itself but also as a agent for the purpose of connecting the property owners to
stevedores
Courts soon accepted the separate contract limiting liability and
Therefore Himalaya clause is not an exception to privity rule but involves a process
that leads to a new contract being created for the benefit of the stevedores and others
handling